Do you ever get the feeling your lender doesn’t trust you?
Are you being asked questions such as why you have listed feed as a current asset, how carefully you have estimated the grain in your bins and just how you came up with that valuation for your equipment?
Perhaps your banker has sat you down for a little chat in which the terms “notice to reader” or “review engagement” were tossed around. That’s his way of saying he’d rather you stop bringing in self-produced financial statements and income tax records and instead provide financial statements prepared by a certified accountant who can, to a certain extent, vouch that the numbers are sound.
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Your lender, of course, says it’s not that he doesn’t trust you, it’s just good business practice. But hiring an accountant isn’t cheap: is it good business for you or just an added
expense?
Jason Murray knows how demanding and seemingly hard-hearted bankers can be.
Five years ago, he spotted a great opportunity in snowboard and skateboard retailing. Boarders are passionate about their decks, bushings and bindings and Murray knew they were fed up with the limited selection and quality offered by sporting goods stores. He was convinced that, even in his hometown of Moncton, N.B., there was an avalanche of pent-up demand for the leading brands of snowboards, skateboards and assorted gear.
Of course, bankers didn’t trip
over themselves to lend money to a 25-year-old in jeans and a T-shirt who didn’t have assets to pledge as collateral.
“I must have gone to 10 banks along with five or six government programs and pretty much got a unanimous ‘no’ from everybody,” Murray said. “They just didn’t understand the industry and said it would never work.”
Still, Murray persevered, managed to assemble some start-up funding and proved his critics spectacularly wrong. Today, Skate To Snow is Atlantic Canada’s largest board merchandiser. Annual sales are about $1 million and Murray has been honoured as one of the region’s brightest young entrepreneurs.
However, Murray doesn’t expect bankers to understand his business any better now than they did five years ago. Nor does he expect to be cut any slack because of what he’s accomplished.
When he meets with his lender, Murray says, “I let the business and the numbers do the talking.”
Because his business is now incorporated, those numbers are of the highest standard, fully audited each year. His accountant has to perform tests on the numbers Murray provides and employs generally accepted accounting principles when calculating depreciation or inventory values.
But here’s the key point. Compared to Murray, his accountant knows squat about those numbers. Murray’s intimate knowledge of his sales and inventory is the foundation of his business.
Take skateboard shoes, for example. Most of Skate To Snow’s customers are in the 12- to 24-year-old age group, which means stocking sizes from three to 15. Counting half sizes and multiples of popular sizes, you need about 40 pairs to be fully stocked.
And that’s just for one colour of one model in one brand. Skate to Snow carries more than a dozen brands of skate shoes alone. If you don’t think that’s risky, you don’t know teenagers.
“A colour that is hot one season can be dead by the next,” Murray said.
So it’s no surprise that Murray has to know, pretty much on a weekly basis, what’s dropping off in sales and what products are selling better.
“We’ve got a lot of money tied up (in inventory), that’s for sure,” he said. “Knowing what our customers want is a huge part of what we do.”
Fine, you might argue, but retail is a whole different game from farming. True enough, but the need to intimately know your numbers is just as important.
If you’re using best guesses for inventory, depreciation and profitability, can you be sure you’ll have sufficient cash flow if commodity or input prices turn the wrong way?
If your banker can’t fully trust the numbers in your debt-to-equity and debt-servicing ratios, what do you think that does for your request for more credit or the best-available interest rate?
I’m not arguing that your lender’s demand for better financial records will, in itself, make you more profitable. A banker just wants to know whether your assets would fetch enough in a quick sale to cover your loan.
And there’s certainly a cost, in both your time and in accountant fees, to generate high-quality
financial records.
If you want to complain that it’s a pain in the butt, you’re on solid ground. But is it an obstacle to becoming a better businessperson? Whether it’s skateboard shoes or replacement heifers, knowing your numbers is crucial to profitability.
Glenn Cheater is editor of Canadian Farm Manager, the newsletter of the
Canadian Farm Business Management Council. The newsletter as well as archived columns from this series can be found in the news desk section at www.farmcentre.com. The views stated here are for information only and are not necessarily those of The Western Producer.
